Despite the GOP's victory, keeping President Trump's tax cut promises will be challenging for Congress.

• During his campaign, President-Elect Donald Trump pledged to reduce various taxes, including social security taxes, tipped income, and overtime pay, as well as corporate income taxes.
• The 2017 Tax Cuts and Jobs Act requires key provisions to be passed, or else individual taxpayers will face across-the-board tax increases and businesses will experience automatic tax hikes.
• If the GOP wins both the Senate and House, lawmakers may be deferential to Trump, but deficit hawks within the president's own party may oppose the high cost and prioritize their own tax cut desires.

During a recent CNBC interview, Steve Mnuchin, the former Trump Treasury Secretary, gave the impression that the President-Elect's tax cut promises were a certainty in terms of legislation.

Mnuchin stated that the top priority is to extend the Trump tax cuts, which is a key component of his program. He believes that it will be easy to pass in Congress, especially if the Republicans maintain control of the House.

Trump promised significant tax cuts to individuals and businesses, including tipped income, overtime pay, some Social Security taxes, tax cuts for first responders and the military, and Americans living abroad, as well as deductions for auto loan interest. However, tax experts are not as confident as Mnuchin that it will be easy to deliver on these tax cuts, even in a GOP sweep scenario, given the growing national debt and rising bond yields, which have been driven in part by the deficit.

According to Rohit Kumar, PWC's tax policy services leader and a former deputy chief-of-staff to Senate Majority Leader Mitch McConnell, the only certainty for corporations is that the odds of a dramatic tax increase have been "taken off the table."

Corporations in the U.S. may face revenue pressure that will reflect on their financial statements, according to the expert.

"Dustin Stamper, head of the tax legislative affairs practice at Grant Thornton, stated that conservatives cannot fulfill all of the 2017 cuts and maintain their campaign promises on the deficit. They will have to make tough decisions on priorities."

The GOP is not always focused on catering to the interests of big business when it comes to tax policy. Instead, they may prioritize populist individual tax cuts. However, it may be difficult for them to balance these individual cuts with corporate wish lists. Stamper suggests that the GOP should reconsider their approach to tax policy in 2025, taking into account the concerns of both individuals and corporations.

In 2017, the original aim was to implement a 15% corporate income tax for businesses that promote U.S.-based manufacturing and employment, but Stamper stated that this would be extremely costly.

A GOP majority, even if relatively narrow, will present challenges for Trump in shaping tax policy, government funding, and the debt ceiling debate. However, there is an expectation that lawmakers will be more deferential to him than they were during his first term. This is evident in the competitive game among those vying for Senate leadership positions, who are eager to demonstrate their loyalty to Trump's wishes.

Assuming the GOP maintains control of the House of Representatives, one of the first big discussions on Capitol Hill will likely focus on extending the 2017 tax cuts and finding ways to finance them without increasing the deficit. Some may argue that it should all be deficit-financed, which would require more than $4 trillion.

The Congressional Budget Office predicts that the Trump tax cuts, if prolonged for a decade, would result in an additional $4.6 trillion in the national debt.

$4.6 trillion deficit and debate over whether tax cuts pay

In conservative economic circles, it is commonly argued that tax cuts can finance themselves, at least partially, through the economic growth they generate. This view is held by many influential politicians on Capitol Hill, including Idaho Republican Senator Mike Crapo.

Stamper claims that the conservative faction in the House is becoming increasingly uncomfortable with the GOP's stance on adding $4.6 trillion to the deficit, as there is no offsetting revenue to balance it out.

House Speaker Mike Johnson has expressed support for the conventional approach of financing tax cuts through economic expansion.

If the Trump administration can convince Congress to pass a large tax bill that is financed through borrowing, it could provide more room for other tax cuts. However, Kumar stated that some Republicans are already starting from the position of requiring every penny of funding to be covered, making it challenging to win their support. He added that convincing these GOP lawmakers to agree could be a heroic task.

Kumar stated that when speaking with lawmakers on Capitol Hill, they are already concerned about their political bandwidth to handle expiring provisions, let alone take on additional tax cuts to finish the job.

The 2017 Tax Cuts and Job Act policies are set to expire, making it a "must-pass year" for Congress to act to avoid "across-the-board tax increases on virtually every individual taxpayer and automatic increases in some business taxes."

Trump may be known as the "most pro-stock market president in history," but for businesses, Kumar stated that obtaining additional tax cuts would be challenging, considering there are several trillion in individual taxes set to expire.

Individual tax cuts versus Social Security, business tax breaks

Despite common belief, individual tax issues have consistently been the more politically significant issue in battles between individual and business tax cuts, according to history.

"Even when there is buzz about tax relief on both sides of the ledger, changes on the individual side often dominate and lead to the failure of Hill battles over a research & development tax credit for corporations," Kumar said.

"New individual tax relief faces the same obstacle: competing for funding with expiring provisions," Trump said.

John Paulson, a hedge fund manager and Trump ally, stated in an interview with the New York Times prior to Election Day that it is possible to fund new tax cuts by reducing their overall cost through stricter eligibility criteria.

Paulson advised keeping the goal concept in mind while implementing guardrails to achieve it, but with a lower revenue impact.

In a limited budget scenario, the "doable" approach, as described by Kumar, could be contrasted with the "all or nothing" strategy.

The Trump administration and GOP members on the Hill are expected to use the reconciliation process to enact tax policy with only Republican votes, as they did in 2017 with the TCJA. However, this simple majority process may be more challenging for other provisions discussed on the campaign trail, such as Social Security tax cuts, as reconciliation rules prohibit changes to Social Security.

Republicans may not let any specific provision in reconciliation force them off the tool, according to Kumar. The political penalty of doing so would be greater than the potential benefits of something that cannot be done through reconciliation.

Stamper stated that achieving Social Security will be the most challenging task, as there are limitations to what can be accomplished through reconciliation. Although there may be alternative ways to write rules, the 60 votes needed to pass any legislation will not be attained. The only viable option is reconciliation, he added.

PWC warns that difficulties in achieving consensus could cause the tax bill to be delayed until the end of 2025.

Trump tariffs and government revenue

The Trump administration has new arguments to limit the deficit impact of new tax cuts through aggressive trade tariffs. However, estimates suggest that tariffs could add $2 trillion to $3.3 trillion in revenue, but this is a figure estimated in isolation from the parallel finding that tariffs would serve as an additional tax on households running into the thousands of dollars annually. Even the trillions generated from tariffs would fall short of what is needed to fully offset the revenue losses of making the expiring provisions of the 2017 tax cuts permanent, according to the Tax Foundation.

The tariffs are not insignificant math in the upcoming tax battle, accounting for up to two-thirds of the cost. However, it would require some flexibility on the Hill when it comes to how tax law is scored. The revenue generated from tariffs would not be officially scored as part of any tax legislation, necessitating House and Senate Republicans to be open to considering revenue from sources not included in the bill or CBO estimates. The GOP would need to have enough political cover to take this approach, and there is a recent precedent for this - offered by the Democrats.

In order to secure West Virginia Senator Joe Manchin's support for the Inflation Reduction Act in 2022, $80 billion in additional IRS funding was included. According to a memo from the CBO, if this funding is used correctly, it will result in the IRS collecting an additional $200 billion in revenue, resulting in a net gain of $120 billion. Kumar stated that this funding was the reason for Manchin's comfort in voting for the bill, and that the GOP would need to do something similar to secure their own support.

The Inflation Reduction Act, which includes many benefits in red states and districts, is a complicated effort that was not a tax promise discussed during the campaign.

"According to Stamper, if you believe in the idea of political capital, which accumulates through actively discussing campaign promises on the trail, you may feel more pressure to fulfill those promises. Therefore, it would make sense for the GOP to choose a few measures that seem most practical and achievable."

Stamper believes that pressure will exist to implement the no tax on tipped income measure because it was one of the first campaign promises and has support from both political parties, including Kamala Harris.

The removal of the SALT deduction limit in Trump's 2017 tax act could result in an additional $1 trillion in the total cost of a new tax bill. However, Stamper noted that there are significant trade-offs, with many GOP members in high-tax districts strongly opposing the SALT cap. The House and Senate majority could be narrow, making it challenging to pass any new tax legislation.

National debt and the bond market

The Trump administration will reveal its campaign proposals in a budget proposal sent to Capitol Hill, typically in the spring. However, the timing of this may change based on whether Trump's term is considered a first or fifth year. Some data points may come in the form of a Treasury Secretary nominee appearing before a Hill finance committee.

Elon Musk may head a government efficiency effort in a second Trump term, but mandatory spending on healthcare, Social Security, debt interest, and defense, which account for about 12%-14% of total spending each, will make it harder to reduce the deficit. Trump has stated that he is not interested in addressing entitlements, and a Republican sweep could make this stance even more politically challenging.

The national debt interest is growing faster than any other budget item, and it is expected to continue to rise. However, neither political party wants to take the heat of major entitlement program changes, which implies that the deficit will continue to grow. The bond market has been signaling this growth, even before the election results were clear. Bond yields have been rising, despite the Federal Reserve cutting interest rates, and this has been attributed to growing concerns about the deficit from the market. These concerns are becoming persistent.

Although the national deficit is currently at nearly $36 trillion and there is a possibility of an additional $5 trillion in the cost of a new tax plan, the focus in Washington, D.C., is not on long-term economic concerns when making decisions.

"The history here reminds us that when long-term deficit concerns clash with near-term policy, near-term victories are often achieved," Kumar stated. "This is a batting average of 1.000." The fact that this principle has been consistently true across both parties over the past 40 years may be the most encouraging factor for passing tax legislation with a price tag of nearly $5 trillion.